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Updated on: Friday, January 14, 2022, 12:02 PM IST

Leveraging automation to reduce risk and increase compliance in BFSI

Regulators are experimenting with ways to create more effective regulatory structures that can strengthen innovations in the regtech sphere. | Freepik

Regulators are experimenting with ways to create more effective regulatory structures that can strengthen innovations in the regtech sphere. | Freepik

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Today, digitization is no longer just a buzzword. Digital is now a reality and part of our everyday lives.

In 2020, most world economies contracted due to the COVID pandemic. However, digitisation has only accelerated. The trend towards remote working is here to stay. Several corporations have announced that about 25 percent of their global workforce would work from offices by 2025.

However, every coin has two sides. Despite remote working and digitisation adding a lot of positives such as cost savings, flexibility, globalisation, and many more, there are a few areas of concern as well.

The world is becoming increasingly digitized, which has led to an increase in fraud. Cyber frauds are on the rise, as well as many other types of security breaches. As a result, cyber security protocols and programs have evolved to meet these challenges.

A sector like BFSI, where providers such as banks, insurance companies, mutual funds, etc. are using public funds, necessitates a framework and regulations that can prevent financial fraud, since any loss is borne by the general public.

Additionally, employees are more likely to misuse or mishandle corporate data with remote working. Keeping track of employee activity and corporate data usage is much more challenging. Therefore, companies should ensure they are taking the proper steps to safeguard their interests as well as complying with regulatory requirements.

Here is where the function of a compliance unit for an organization becomes critical.

In order for the compliance team to achieve the agenda as described above, they need all the assistance they can get. Technology and automation are their biggest allies in achieving this goal. Compliance policies and procedures are created to ensure regulatory compliance, but automation is the only way they can keep up with the constant changes in the business environment. Identifying and nullifying non-compliant activities and practices is very difficult without automation.

Automation-Best friend of statutory compliance

Regulatory compliance evolves over time to include new elements while maintaining earlier compliance requirements. Thus, the regulatory compliance requirements keep growing with complexities and the compliance team's function keeps increasing. Automation becomes critical to keep things in balance.

What can be automated?

1. The process of generating periodic regulatory reports

2. Keeping track of regulatory submission timelines and delays

3. Prohibition of Insider Trading policies

4. Activities associated with general compliance

It was considered difficult to automate many of these areas up until a few years ago, but technological advancements have helped the compliance team. With the advent of Robotic Automation, AI and ML, digital automation initiatives have been revolutionized.

Below are a few areas where automation of compliance can be beneficial

1. A centralised solution for tracking organisational activities in real-time

2. AI and machine learning algorithms for fraud detection and non-compliance detection

3. Reduction of data errors when generating regulatory reports

4. Internal and external audit processes would be more transparent with audit trails for all actions taken by employees and management

Automation improves employee efficiencies

1. With automation, managers can oversee the work of employees, regardless of where they work.

2. Automating routine tasks increases employee productivity, especially mundane daily tasks. Therefore, employees are able to devote more time to strategic work.

3. By automating many activities, a significant amount of time can be saved. By doing so, businesses can expand without the need to hire more employees.

4. Companies can make better use of employee expertise by automating collaborative working between employees based at different locations.

Rise of Smart Contracts

One area that is rapidly developing is the use of Smart Contracts, which may allow regulators to monitor various automated financial transactions in real-time. For example, regulatory authorities can receive automated alerts when a bank exceeds thresholds set in its capital model (i.e. capital ratios based on realized or projected losses) allowing them to take predetermined action.

Furthermore, regulators are experimenting with ways to create more effective regulatory structures that can strengthen innovations in the regtech sphere.

In spite of sometimes high costs, a number of reasonably priced compliance automation solutions are available. Moreover, the cost of non compliance can be used in comparison to the cost of automation, as automation mostly ends up being much more cost-effective in the long run.

As Eliyahu Goldratt had once said “Automation is good, so long as you know exactly where to put the machine”. Thus, if the automation of compliance is well planned, the company can reap great benefits and satisfy all stakeholders, including "Regulatory Authorities".

(Debashish Roy is Director, Infomatics Services Pvt Ltd)

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Published on: Friday, January 14, 2022, 12:01 PM IST
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